Swine flu outbreak hurting Mexico’s ailing economy

Retail sales are dropping as fears of infection keep people
at home,while trade or travel bans could cause much more
serious damage

By Michael O’boyle / REUTERS , MEXICO CITY

ILLUSTRATION: MOUNTAIN PEOPLE

A deadly flu outbreak in Mexico will deal another blow to an already bruised economy as fear of infection scares away foreign tourists and keeps nervous Mexicans indoors with their purses shut.

The global economic slump is already pushing Mexico’s economy into its worst recession since a devastating mid-1990s financial crisis, as the sharp downturn in the US, Mexico’s chief trading partner, whacks demand for exports.

Now the flu outbreak, which has killed up to 149 people in Mexico and afflicted dozens in the US, Canada and Europe, could drive the country into an even deeper funk.

Economists say the epidemic looks like it could shave another half percentage point of growth off an economy already set to shrink more than 3 percent this year.

It could have an even bigger impact on GDP if the crisis widens and countries issue outright travel bans to Mexico or block trade.

“The economy is in serious peril already. This will add to that drop,” said Eugenio Aleman, an economist at Wells Fargo, who sees the outbreak knocking an extra 0.6 percent off GDP this year, adding up to a contraction of 4.5 percent.

The flu outbreak snowballed over the weekend into one of the biggest global health scares in years just as Mexico’s government has its hands full fighting the recession and a high-stakes war on drug cartels.

The health minister warned on Monday that the number of flu cases could rise further.

“This is just throwing more fuel on the fire,” said Bertrand Delgado, an economist at RGE Monitor in New York.

He was previously forecasting a 4.6 percent drop in Mexican GDP in 2009, but sees the flu epidemic cutting off an additional 0.5 percentage point.

Mexican retail sales slumped 8.6 percent in February as factory layoffs undercut consumer confidence. Sales could dry up further if fears of contagion keep people at home and out of already struggling supermarkets, shops and restaurants in the days ahead.

“If the health crisis lasts for a week or two, it will have an impact, but not as much as if it takes a long time or there are direct restrictions on trade or tourism to Mexico,” Delgado said.

Millions of Mexico City residents stayed at home, emptying shopping malls, cinemas and bars, as nightclubs, concert venues, soccer stadiums and even churches closed over the weekend. The city government said closures could last 10 days.

The federal government extended school closures across the nation on Monday, raising chances that spending in other cities will also be curbed. That could further hurt a service sector that makes up around 60 percent of the economy,

Even though there was no evidence the new flu strain was directly related to the pork industry, Russia, China, and the Philippines were among a string of countries to slap bans on Mexican and US pork. While Mexico is not a major pork exporter, the actions raised the prospect of further protectionist measures.

Delgado said Mexico’s economy could shed an additional percentage point of growth, should any major government ban its citizens from traveling to Mexico.

No country has taken that step yet, but US Secretary of State Hillary Clinton has urged caution about travel to Mexico and the EU’s health chief said citizens should avoid non-essential travel to areas hit by swine flu.

Mexico is one of the world’s top vacation destinations. Tourists spent more than US$13 billion in the country last year, visiting its lush beach resorts and inland colonial towns.